No increase in the debt ceiling will hit US quickly

Chart of the Week

by Gabriel Stein in London

Mon 14 Oct 2013

What the chart shows: The chart shows the US Federal Government monthly cash balance over the past ten years

Why the chart is important: One – of many – problems relating to the discussion about the US Federal Government debt ceiling is the monthly pattern of revenue and expenditure. The first three months of the fiscal year – October to December – tend to be deficit months. Only in January is there usually a cash surplus. But by that time, the cumulative balance is already so deep into the red that it is impossible to catch up.

This means that failure to agree a lifting of the government debt ceiling means that – once accounting manoeuvres have been exhausted – expenditure must adjust to revenue. An agreement still seems the most likely outcome, although for how long or what it would involve is uncertain.

Failure to reach an agreement until the end of November, for instance, would mean that – by recent standards, government spending would have to be cut by about 200 billion dollars, or 1.2% of GDP. But, of course, this would all hit the economy in one quarter, meaning an annualised equivalent impact of close to 5% of GDP – enough to push the economy back into recession with a vengeance.